us capital 2One of the Trump administration’s high profile initiatives is the review and rollback of many of the Dodd-Frank Act’s features.  Consistent with these efforts, an updated version of a bill that would undo many of the Act’s provisions is now making its way through Congress. The Financial Choice Act (H.B. 10) was introduced in April by Rep. Jeb Hensarling (R-Tex.) Because Hensarling introduced a similar bill with the same name during the last Congressional session, the recently introduced bill is referred to as Financial Choice Act 2.0. The bill, which has already passed through the House Financial Services Committee, addresses a number of high profile issues affecting the regulation of the financial system. The systemic issues are attracting all of the headlines. Other features of the bill are attracting less notice. Of particular interest here, the bill introduces a number of changes to the SEC’s enforcement authority. As Columbia Law School Professor John Coffee commented in congressional hearing testimony, these changes, if enacted, would “hobble the SEC’s enforcement program,” and the “cumulative effect” would be “devastating.”


The latest version of the Financial Choice Act introduces sweeping changes to the reforms Congress enacted in the Dodd-Frank Act in the wake of the global financial crisis. Among other things, the bill would alter the authority of the Financial Stability Oversight Panel; reform the structure of the Consumer Financial Protection Bureau; and eliminate the fiduciary duty standard that the Department of Labor has proposed for investment advisors. As Alison Frankel discusses in an interesting May 9, 2017 post on her On the Case blog (here), the bill also contains a number of provisions that would alter the SEC’s enforcement authority and provisions.


Some of the bill’s measures strengthen the SEC’s enforcement authority. For example, the Financial Choice Act significantly increases the SEC’s civil penalty authority. The bill nearly doubles the penalties for offenses involving substantial losses for the victim or substantial pecuniary gain. The bill also triples existing monetary penalties for “recidivist offenders.”


One particular SEC enforcement initiative that the bill addresses is the SEC’s use of its own administrative law courts as the forum for civil enforcement actions.  The SEC’s use of these administrative courts arose from Section 929P of the Dodd-Frank Act, which expanded the SEC’s authority to obtain civil penalties in administrative proceedings. The SEC’s use of its administrative courts has proven to be contentious; federal courts have questioned the constitutionality of the agency’s use of the administrative proceedings and commentators have suggested that the administrative courts give the agency an unfair “home court” advantage.


The Financial Choice Act includes a measure giving defendants in enforcement proceedings in the administrative forum the right to have the action removed to federal court. As Professor Coffee suggested in his congressional hearing testimony, most defendants would opt to remove their action, “if only to slow the pace down.” Coffee further noted that the SEC is “severely resource constrained,” and its use of administrative proceedings permits the agency to litigate at a lower cost and more quickly. The slower the SEC must go, “the more wrongdoers who escape sanctions.” Coffee acknowledged the constitutional questions surrounding the agency’s use of the administrative courts, but he would prefer to see these issues left to the courts to address.


Another feature of the bill provides that if an enforcement action defendant chooses to remain in the administrative forum, the SEC must establish liability by “clear and convincing evidence.” As Coffee notes, “this is a standard usually reserved for issues involving loss of civil liberties.” It “adds another unnecessary obstacle to the SEC’s ability to enforce the federal securities laws.”


The Financial Choice Act also focuses on a perceived problem with the agency imposing civil penalties on corporations that violate the federal securities laws instead of bringing enforcement actions against individual offenders. The concern is that the corporate awards may not be having the intended deterrent effect. Another concern is that the costs are being imposed on companies and shareholders. In order to try to align the imposition of civil penalties with policy and enforcement goals, the bill would require the SEC, when imposing a penalty, to include a report by the agency’s Chief Economist that the penalty target benefited from the wrongdoing and that the penalty does not harm innocent shareholders.


The bill also restricts the agency’s ability to impose automatic disqualification that bars individuals from engaging in future related activities or relying on exemptions. The bill would allow defendants to obtain exemptions from automatic disqualification unless the SEC, following a hearing, determines that the individual is ineligible for the exemption. As Frankel notes, this change “puts a crimp in the SEC’s leverage in settlement negotiations.”  In her Congressional hearing testimony, Maryland Securities Commissioner Melanie Senter Lubin called this measure “baffling and misguided” as well as “contrary to public policy and common sense.” She asked why Congress would make it easier for individuals to rely on exemptions that enabled their misconduct. Professor Coffee added that he sees no reason to take this power away from the agency.


The bill introduces a number of other measures. Among other things, it requires the agency chair to convene a committee with a mission to review the agency’s enforcement program to insure that it is consistent with the agency’s overall goals and mission. The bill establishes an Enforcement Ombudsman to review complaints about the agency’s enforcement program. The bill also requires the agency to publish an Enforcement Manual to ensure transparency and uniform application of its procedures. The bill would also prohibit whistleblower awards to persons that were involved in the reported misconduct.


Though many of the proposed changes are more or less neutral, overall the bill proposes to overhaul and rein in the SEC’s enforcement authority and activity. It certainly represents a significant policy shift from period just after the global financial crisis, when the SEC faced criticism for not being active enough. Whether or not the proposed changes represent a positive development is another question. For his part, Professor Coffee said that the proposed changes will “hobble the SEC’s enforcement program” and the “cumulative effect” of the changes “will be devastating.”


There is no way to know at this point which if any of the Financial Choice Act’s provisions actually will be enacted into law. The bill seems likely to clear the House of Representatives but its prospects in the Senate are less certain. With so many other higher profile features to the bill, the provisions relating to the SEC’s enforcement authority may not attract as much attention or discussion. The various measures affecting the SEC could become law as a relatively unexamined part of a much larger initiative. In any event, it will be important to watch this legislation as it makes its way through Congress.